A single-tier pension: what does it really mean? - The Institute For ...

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Proposed reforms In contrast, under the proposed system, anyone with a foundation amount of at least £146.30 will not be able to accrue any more state pension entitlement. For the individuals just described above, this means that neither Zainab nor Mohammed would be able to accrue any further state pension entitlement after 2016, whereas Ava would be able to do so. (Ava would accrue £4.18 of extra state pension income for each additional year of contributions.) This is despite the fact that Mohammed and Ava have essentially paid the same net NI contributions in the past and will continue to do so in the future, if they both continue to work and earn the same amount. The apparent inequity between Mohammed and Ava in their ability to accrue further state pension entitlements after 2016 arises from how the government has chosen to deal with past contracting out in the Pensions Bill reforms. The option chosen means that the system will move more quickly towards a simple, easy-to-understand single-tier pension, in which most new pensioners will receive the full single-tier pension from the state. However, it has the disadvantage that it treats individuals who contracted out in the past differently from those (otherwise-identical) individuals who contracted in. Indexation of pension rights after 2016 From April 2016, up to £146.30 of individuals’ foundation amount entitlement will be earnings indexed, while any state pension entitlement in excess of £146.30 will be increased by CPI inflation (this applies both before and after someone reaches SPA). Under current legislation, SERPS/S2P entitlements are uprated by inflation after the SPA but revalued in line with average earnings growth during working life. For example, in 2016, Mohammed – described above – will get a foundation amount of £184.00 – equal to his current scheme valuation at that point. Under the current system, until he reaches the SPA, all of this £184.00 will be uprated each year in line with growth in average earnings. However, once he reaches SPA, his BSP entitlement (£109.00) will continue to be uprated with average earnings growth, while his additional pension entitlement (£75.00) will only be increased in line with CPI inflation. Under the single-tier system, from 2016 onwards £146.30 of his state pension entitlement would be uprated in line with average earnings, while the remaining £37.70 would be increased in line with CPI inflation. This would continue after he reaches SPA. Whether specific individuals gain or lose from this change to uprating policy will depend on exactly how much their foundation amount exceeds £146.30 and how many years they have left before they reach the SPA. The implications of transition The proposed pension system will result in a significant windfall increase in the state pension rights of three particular groups: 21
A single-tier pension: what does it really mean? • those who were employed on relatively low earnings (although still at or above the LEL) between 1978 and 2001 – these individuals will have accrued BSP but little or no SERPS entitlement; • those who were carrying out activities prior to 2002 that earned entitlement to BSP but not SERPS – for example, caring for children, caring for sick or disabled adults, or receiving certain out-of-work benefits; • those who have been self-employed. For these types of individuals, the proposed system is likely to represent a windfall gain. As discussed in greater detail in Chapter 4, most of these ‘winners’ are in earlier cohorts. In addition, those who have spent periods contracted out of SERPS/S2P will have the potential to accrue a larger total pension than otherwise-identical individuals who had been contracted in, as they will be able to ‘work off’ these contractedout years in order to qualify for an increased state pension with no loss of private pension from their years spent contracted out. Given the transition rules proposed in the White Paper, almost no one would see a significant reduction in their accrued entitlement as a result of the reform. 32 Those whose foundation amount exceeded the single-tier pension level in 2016 would have that entitlement ‘protected’. 33 However, there are potentially a large number of individuals who have not yet reached the SPA who should anticipate accruing a state pension entitlement of more than £146.30 under the current system and who would, therefore, receive less under the proposed system than under the current one. As described in Chapter 5, these losers are most heavily concentrated in later cohorts – those who entered the labour market after (or not very long before) 2002. 3.5 Changes to means-tested benefits The current system of means-tested benefits for pensioners includes the pension credit, which itself is comprised of two components – the pension credit guarantee credit (PCGC) and the pension credit savings credit (PCSC). The PCGC tops up income to a minimum level (£145.40 for a single person and £222.05 for couples in 2013–14), whereas the PCSC was introduced to reward private saving and has a maximum award of £18.06 (£22.89 for couples). As of November 2012, 14% of 65- to 69-year-olds claimed the pension credit and 32 Some groups who do – those with fewer than 10 years of contributions and those who would have received pensions based on their spouse’s entitlement who will now only receive a pension based on their own contributions – are discussed in Chapter 4. 33 The proposed ‘protection’ does actually constitute a small reduction in pension entitlements for this group. This is because state pension rights in excess of the single-tier level will only be uprated between 2016 and SPA in line with CPI inflation, rather than average earnings growth, as would happen under current legislation. 22
Page 1 and 2: A single-tier pension: what does it
Page 3 and 4: Published by The Institute for Fisc
Page 6: Contents Executive Summary 1 1. Int
Page 11 and 12: 1. Introduction In a White Paper pu
Page 27: A single-tier pension: what does it
Page 55 and 56: 5. Long-Run Effect of the Proposed
Page 69 and 70: 6. Wider implications of the propos
Page 75 and 76: 7. Conclusions Pensions Bill 2013-1
Page 77 and 78: References Attanasio, O. and Rohwed

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